Steel Industry Steadily Gaining Strength

Over the past few years, the steel industry has been reaping the benefits of accelerating growth in the developing economies. Asia, particularly China, was the principal growth driver. However, the recent turnaround has rendered the scenario slightly concerning as China began to add an element of uncertainty to the outlook.

Nevertheless, there are plenty of reasons to be optimistic about the broader steel industry, both in the short and the long term. Here, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.

Rebound in Construction Sector

The housing and construction sector is the largest consumer of steel today, accounting for almost half of the total consumption. Improved job numbers, a recovering economy and growing consumer confidence, moderating home price gains, affordable interest/mortgage rates, rising rentals, rapidly rising household formation and a limited supply of inventory all point to continually strong demand trends in 2016.

The US Architecture Billings Index (ABI), an economic indicator that provides an approximately 9-to-12-month glimpse into the future of non-residential construction spending activity, has lately remained over 50. Note that a score above 50 indicates an increase in billings. The American Institute of Architects (AIA) anticipates spending in the non-residential building sector to climb 8.3% this year. Nucor Corporation (NUE) and Commercial Metals Company (CMC) are the leading steel suppliers to the non-residential construction sector.

The National Association of Home Builders (NAHB) reported that the home builder sentiment index (HMI) remained flat for the fourth consecutive month in May at 58. This indicates steady growth in the sector driven by an improving job market and low mortgage rates.

Over the long haul, as the urban population increases worldwide, the need for steel to build skyscrapers and public transport infrastructure should see an uptrend as well. Emerging economies will continue to be major demand drivers due to the huge amount of steel required for urbanization and industrialization. Hence, demand for steel is expected to remain strong in the years to come. Companies like United States Steel Corp. (X), ArcelorMittal (MT), Nucor Corp. and Steel Dynamics Inc. (STLD) would benefit from the momentum in construction.

Booming Automotive Sector

The automotive sector, which is the second-largest steel consumer, is showing significant promise despite threats from other materials. Besides giving a boost to the already rising U.S. auto sales, cheap oil has backed a recovery in the European auto market. The rising sales trend is expected to continue in 2016 on the back of falling fuel prices, low interest rates, enhanced job security, rising wages and household wealth, improving consumer confidence, residual pent-up demand, attractive deals and vehicle launches.

Moreover, the high average age of light vehicles on U.S. roads is resulting in large replacement demand for cars as well as car parts. The average age is expected to rise to 11.5 years by 2017 and 11.7 years by 2019 from 11.4 years at the end of 2013, according to forecasts by IHS Automotive. This will benefit auto parts manufacturers and retailers.

The auto industry in Asian countries, particularly China and India, are also expected to flourish over the next five to seven years. China is the biggest and fastest growing auto market in the world in terms of number of vehicles sold. With automakers cashing in on strong demand, steel is expected to get a proportional boost in the years to come. ArcelorMittal and AK Steel Holding Corp. (AKS) generate a large portion of their revenues from auto companies.

Indian Steel Sector to be a Major Driver

India is currently the fourth largest producer of steel in the world. The Indian steel industry is expected to record exponential growth in the future, riding on increasing urbanization and projected growth in the infrastructure, automobile and real estate sectors.

The country's comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction, along with the thriving automobile and railways sectors, offer huge scope for growth. In fact, as per the World Steel Association, steel demand in the sub-continent is projected to grow 5.4% in 2016 through 2017 to attain a peak of 88.3 Mt in 2017.

Steady Growth in Developed Economies

Developed economies are expected to witness a stable recovery momentum, albeit at a slow pace. Steel demand in these regions will grow 1.7% in 2016 and 1.1% in 2017. In the EU, steel demand is recovering in tandem with generally improving economic sentiments and investment conditions. Demand is projected to grow 1.4% in 2016 and another 1.7% in 2017. In the U.S., an improving job market and a strong housing sector will support growth in steel demand of 3.2% in 2016 and 2.7% in 2017.

Imposing Anti-Dumping Duties

U.S. steel companies have been hammered by a tide of cheap imports over the past few years that largely contributed to the slump in steel prices. Biggest U.S. steel producers - United States Steel, AK Steel, Nucor, Steel Dynamics and ArcelorMittal USA, part of ArcelorMittal, retaliated by filing anti-dumping petitions in Jul 2015 with the U.S. International Trade Commission ("USITC") and the DOC against eight countries (Brazil, China, India, Japan, the Netherlands, Russia, South Korea and the UK) alleging illegal dumping of cold-rolled steel that is used to make automotive products and appliances, among others.

The petitions stated that an influx of subsidized imports of cold-rolled steel from these foreign producers is causing serious injury to the country's steel industry as they are capturing an increasing share of the U.S. market, thereby hurting production, shipments, selling prices and margins of U.S. steel makers.

On May 17, The U.S. DOC concluded that both China and Japan are selling these products in the American market below their fair values and therefore, would be subject to anti-dumping duties.

The DOC thus imposed a hefty final anti-dumping duty rate of 265.79% on imports of cold-rolled steel from China. The department also issued its final rulings on countervailing duty investigations on imports of cold-rolled steel from China. Moreover, it levied a massive final countervailing duty rate of 256.44% on Chinese imports, higher than the preliminary duty rate of 227.29% imposed in Dec 2015. The commerce department is now expected to issue its final rulings on imports of cold-rolled steel from Brazil, India, Korea, Russia, and the UK on Jul 13.

These actions are expected to assist American steel makers defend their turf against illegally dumped steel products and boost the margins of steel companies.

Bottom Line

As you can see, there are many reasons to be optimistic about the steel industry over the long haul. But what about investing in the space right now?

Check out our latest Steel Industry Outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for the future.